Unit 3 Discussion

Unit 3 Discussion

Companies often use leverage to augment profits.Based on what you learned this week, please explain the following in detail:

• With regards to Operating Leverage, please explain why a company with HIGH Operating Leverage faces greater financial risk in a declining sales period compared to a company with LOW Operating Leverage.(HINT: The key here is the relation between fixed costs and variable costs.)
• What does a business's Contribution Margin represent?What does the Contribution Margin have to do with Operating Leverage?